Procure-To-Pay (“PTP”) is a key business process of any company engaged in the business of trading or manufacturing. Typically, the business events in this process start with the receipt of goods for inspection and the delivery of goods to a warehouse location, followed by the recognition of payment liability for a supplier invoice. The process ends with final payment to the supplier and recognition that the PTP process is complete. There may also be other events such as a return of goods to a supplier, recognition of credit from the supplier for returns or discounts, and settlement with the supplier for credits as part of a reverse logistics process.
These business events are typically processed by more than one business application module of any Enterprise Resource Planning (“ERP”) software. For example, receipts may be processed in an inventory module, invoices may be processed in an Accounts Payable module, payments may be processed in a Cash Management module, etc. Generally accepted accounting principles (accrual basis of accounting) mandates the creation of financial accounting entries when the business event happens. Table 1 below represents a typical chain of financial entries, or a Purchase Order Document (“POD”), showing a business event, the debits and credits to accounts as a result of the event, and an ERP module that may handle the task of recording the financial accounting entries.
TABLE 1EventDr/CrAccountExplanationERP ModuleReceiptDrReceiving InspectionRepresent value of goods inInventory/Receiptreceiving bayAccrual AccountingCrSupplier AccrualProvisional recognition ofSystemliability based on purchaseorder price pending invoicefrom supplierDeliver toDrInventoryRepresent the value of goodsInventory/Costwarehousedelivered to warehouseAccounting SystemCrReceiving InspectionWash the Receivinginspection as goods movedout of receiving bayInvoiceDrSupplier AccrualWash the Supplier accrual asAccounts Payablefrominvoice from supplier isSystemsupplieraccountedCrAP LiabilityRecognize final liability tosupplier based on supplierinvoiceDr/CrInvoice Price VarianceThe different betweenprovisional liability and thefinal liabilityPayment toDrAP liabilityWash the AP liability asAccounts Payablesupplierpayment is made to supplierSystemCrBankReduce balance from bankaccount from where paymentis made to supplier
Ideally all the receipts made should be invoiced and the balance in the Supplier Accrual account should be zero at the end of the PTP cycle for a POD. However, there could be balances in accrual accounts (i.e., an account that recognizes revenues and expenses when they are earned or incurred regardless of the actual cash inflow/outflow) due to the following possible reasons: not all receipts have been invoiced but the supplier has settled; less than the invoiced quantity was received but the supplier has settled; there is a small quantity/amount difference due to rounding differences across application modules; a receiving clerk mistakenly failed to enter the receipt; an invoice clerk mistakenly failed to enter the invoice from the supplier, etc. One of ordinary skill in the art will recognize there could be many various other reasons why the accrual account value is incorrect.
The balance in accrual accounts should ideally represent only receipts which are yet to be invoiced and invoice quantity yet to be received. However, possibly due to reasons discussed above, the balance may be inaccurate and therefore should be reviewed and reconciled. This task is referred to as accrual reconciliation. Accrual reconciliation involves extracting accounting reports, manually examining each purchase order, and manually clearing balances where there is no major error. The task of accrual reconciliation is thus a non-value adding and time consuming activity.
The valuation of inventory delivered to a warehouse is based on provisional accrual accounting, which uses the price in the POD if an invoice corresponding the POD has not yet been entered into the system. However, the final price paid to the supplier may be different from the one tentatively agreed upon or estimated in the purchase order document. Thus, there is potentially a need to re-value the inventory to reflect the final price paid on the supplier invoice, depending on inventory accounting policies. Also, after the purchase order has been finally paid to the supplier, the un-cleared balance in the accrual account should be cleared and the inventory should be re-valued to reflect the final price paid to the supplier.
Thus, in typical PTP accounting, manual account reconciliation must be performed to clear accrual account balances where the purchase has been settled, and to reconcile an invoice price paid to a supplier that is different from the purchase order price. This manual process can be very time consuming and prone to human error.